PAYE is operated by employers as part of their payroll, deducting tax and NI before paying an employee their wages. Other deductions, such as pension contributions or student loan repayments, can also be processed through payroll.
Employers tell HMRC about any wages and deductions by using payroll software to send a Full Payment Submission (FPS). The information is used to calculate the employer’s PAYE bill, so that they can pay the deductions on to HMRC.
If someone else (such as an accountant!) processes payroll on behalf of the employer, they’ll also submit the FPS for them and then let the employer know how much PAYE they owe.
How do I register as an employer for PAYE?
You’ll be registered for PAYE when you register as an employer with HMRC. You should register before taking on staff or subcontractors for the first time!
PAYE basically allows employees to pay tax and NI on their wages in instalments, rather than getting a scary looking tax bill at the end of each year. The instalments are calculated based on what an employee is expected to earn during a tax year, taking into account their personal allowance.